Flipping in Philadelphia

By

Maura Webber Sadovi

Updated Jan. 29, 2013 9:34 p.m. ET

A Philadelphia office tower is set to sell for nearly double the price it fetched three years ago, an example of the eye-popping returns that some real-estate investors are posting even in markets that haven't fully recovered.

Rosemont Realty, a closely held real-estate investment company in Sante Fe, N.M., agreed to acquire the 29-story property at 2000 Market St., for roughly $110 million, according to people familiar with deal. The seller, a fund controlled by CBRE Global Investors, purchased the black-metal-panel and tinted-glass-clad building for $56 million in 2009, during the real-estate downturn. At the time, the building was owned by a lender that took the property back in lieu of foreclosure from a fund that was part of Deutsche Bank AG's asset-management business.

ENLARGE

Rosemont Realty is buying this office tower.
CoStar Group

The deal is a reminder of how a strong stomach in tough times can pay dividends. Those who bought in less-expensive cities and suburban markets at the bottom of the market stand to benefit as buyers are increasingly scouring those areas for properties that can provide better returns than pricey ones in bigger cities such as New York. "There are a lot of hungry sharks in the water, and it really has positioned some folks very well," said Kyle Schmidt, a broker based in East Rutherford, N.J., with Cushman & Wakefield Inc.'s Metropolitan Area Capital Markets Group.

Last year, investors began selling properties acquired during the downturn in the strongest markets, such as San Francisco and Manhattan, where the rents and occupancies have been rising. Now, the trend is beginning to play out around the country even in slower markets.

"People may say Philadelphia's office market is taking off, but I think that's premature. It's that [CBRE] bought at the bottom of the market, spent a lot of money stabilizing it, and are now selling it," said David Rubenstein, founder and senior managing principal of Rubenstein Partners, a Philadelphia real-estate investment firm.

CBRE Global Investors, an investment-management affiliate of CBRE Group Inc.,CBG1.01% was one of the bigger bottom fishers during the real-estate downturn, snapping up about $563 million in properties in 2009, according to Real Capital Analytics. The firm's Strategic Partners U.S. Value 5 Fund bought the Philadelphia property. Brokers from CBRE Group represented CBRE Global Investors in the building sale.

Back in 2009, Mike Burrichter, a principal of CBRE Global Investors, was one of the few optimistic voices who said it still made sense to buy partially vacant buildings and add value by leasing them up.

That is exactly what CBRE went on to do in Philadelphia. The building, which was 20% vacant in 2009 with a number of leases set to expire, is now only 5% vacant. CBRE was able to bring in new tenants in part because it spent about $20 million renovating space for new tenants and upgrading the lobby. For example, the law firm Marshall Dennehey Warner Coleman & Goggin became one of the building's newest anchors when it moved into about 134,000 square feet, or 20% of the space, on a lease that extends through 2027. CBRE Global Investors declined to comment on the sale to Rosemont Realty.

The downtown Market Street corridor that has long drawn commercial tenants is starting to draw more residents. That has helped the building's marketability even as the Philadelphia area's office market hasn't fully recovered. The Philadelphia office market's vacancy rate ticked down to 14.7% in the fourth quarter, below 15.3% in the year-earlier quarter but still above the 11.1% low hit in the third-quarter of 2007, according to Reis Inc.,REIS-0.61% a real-estate research firm.

Rosemont Realty has been on a buying spree, snapping up at least a half-dozen trophy office buildings last year in such cities including Denver, Houston and Nashville, Tenn. Some of the New Mexico-based firm's executives have ties to powerful East Coast politicians. Daniel Burrell, Rosemont's chief executive, was Sen. John Kerry's West Coast finance director during his campaign for presidency. In addition, R. Hunter Biden, the son of Vice President Joe Biden, is on Rosemont's board of advisers. The firm's holdings include 16 million square feet of office space in 25 states.

The deal is expected to have an initial annual return of about 7%, above the 5% yield and lower that similar properties offer in larger markets.

If the deal closes as expected, CBRE will be rewarded for the gutsy outlook one of the fund's principals maintained at the bottom. "There's a lot of chatter out there as to how real estate is being priced today," Mr. Burrichter said in an interview on his firm's broader strategy in 2009. "We are taking into account that eventually you will lease your vacancy."

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